1/18/2012

Bush Tax Widened US Wealth Gap, Says Study

A recently-released report by the Congressional Research Service (CRS), on the changes in the distribution of income among individual filers of tax returns between 1996 and 2006, has concluded that the tax cuts that were first enacted under the presidency of George W. Bush have contributed to a widening of the United States wealth gap.

The CRS report examines changes in income inequality among US tax filers between 1996 and 2006. In particular, it points out that Congress will soon need to address issues affecting the distribution of taxpayers’ income in the US.

For example, the Administration has stated that one of its principles for tax reform is to observe the “Buffett rule” that “no household making over USD1m annually should pay a smaller share of its income in taxes than middle-class families pay,” while Congress will need, later this year, to debate the scheduled expiration (at the end of 2012) of the 2001 and 2003 Bush tax cuts.

The CRS found that inflation-adjusted average after-tax income grew by 25% between 1996 and 2006 (the last year for which individual income tax data is publicly available). However, the average increase obscures a great deal of variation; in that “the poorest 20% of tax filers experienced a 6% reduction in income, while the top 0.1% of tax filers saw their income almost double.”

In addition, the CRS also found that “tax filers in the middle of the income distribution experienced about a 10% increase in income, and the proportion of income from capital increased for the top 0.1% from 64% to 70%.”

It has been ascertained that capital gains and dividends were a larger share of total income in 2006 than in 1996 (especially for high-income taxpayers) and were more unequally distributed in 2006 than in 1996, and that changes in capital gains and dividends were the largest contributor to the increase in the overall income inequality.

However, total taxes (individual income tax, payroll tax and the corporate income tax) also contributed to the increase in income inequality between 1996 and 2006. Taxes reduced income inequality by 5% in 1996, but by less than 4% in 2006. Taxes were therefore more progressive and had a greater equalizing effect in 1996 than in 2006.

The major tax change between 1996 and 2006 was enactment of the Bush tax cuts, which reduced taxes especially for higher-income tax filers. Those tax cuts involved reduced tax rates, the introduction of the 10% tax bracket (which reduced taxes for all taxpayers), and reduced tax rates on long-term capital gains and qualified dividends.

Furthermore, in 1996, long-term capital gains were taxed at 28% (15% for lower-income taxpayers) and all dividends were taxed as ordinary income. By 2006, long-term capital gains and qualified dividends were taxed at 15% (5% for lower-income taxpayers).